In a recent report, Barclays Plc has warned that global bonds are poised for continued decline unless a significant downturn in equities sparks renewed interest in fixed-income assets. Analysts at the bank, led by Ajay Rajadhyaksha, assert that there is no magic yield level that can automatically attract enough buyers to initiate a sustained bond rally.
“While there is no specific yield threshold to trigger a bond rally,” the analysts stated, “one scenario that could lead to a material bond rally in the short term is if risk assets experience a sharp decline in the coming weeks.”
The global bond market has been roiled in recent months, primarily due to expectations of prolonged higher borrowing costs, particularly in the Treasury bond market. Although the sell-off momentarily eased, market participants remain vigilant for potential volatility resurgence, especially if U.S. non-farm payroll data, set to be released on Friday, surpasses expectations.
Barclays analysts believe that the U.S. central bank is unlikely to scale back its quantitative tightening program, effectively making it a net seller of Treasuries. Additionally, the increasing bond supply, driven by a rising deficit, is pushing up the term premium, further weighing on bond market sentiment.
The report also points out that demand for bonds is likely to remain weak as foreign central banks reduce their net purchases. Japanese investors, who are the largest overseas holders of Treasuries, are expected to turn their preference toward domestic debt as yields are anticipated to rise when the Bank of Japan adjusts its accommodative policy stance.
In light of these factors, Barclays contends that the fate of the bond market is intimately tied to the performance of equities. The recent approximately 5% drop in the S&P 500 Index over the past three months falls short of what is required to initiate a rebound in fixed income.
“The magnitude of the bond selloff has been so remarkable that, from a valuation perspective, stocks are arguably more expensive than they were a month ago,” the analysts remarked. “We believe that the eventual path to the stabilization of bonds lies in a further downward repricing of risk assets.”
As investors brace for potential market turbulence, the relationship between bonds and equities remains a key focal point, with the future of global bonds hinging on the trajectory of stock markets worldwide.
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October 4, 2023
Delino Gayweh
Serrari Financial Analyst
